Sunday, April 11, 2010

Online business models: 1998 revisited

What sorts of business models will support online media? It's a billion-dollar question. And while many suppose it's a relatively new concern, it's actually something the media industry has been struggling with for well over a decade.

I know this, because when I first started writing about Internet media 12 years ago, I asked companies that offered free Web services how they intended to generate revenue to support their operations. Over the weekend, I dug up a few of these old articles to not only document the sort of thinking that was common among Web media executives in the late 1990s, but also to show how little certain aspects of the industry have changed. Besides reprinting the articles, I am adding some commentary in between them and at the end of this blog post.

But first, some background: I wrote both of the following articles when I worked at the China News newspaper in Taiwan in 1998. At the time, ICRT radio in Taipei had recently launched a free Web-based streaming service, which allowed a very small number of listeners outside of their broadcast range to tune into ICRT programming. LoveMatch was an online dating service, also based in Taiwan, which was experiencing "exponential" growth. The ICRT article was published in August 1998, and the LoveMatch article was published two months later. When you read the articles, you may get a chuckle at some of the references to old technologies or site statistics, but the descriptions of business practices and user trends may seem very familiar:

Would you pay for ICRT?

By Ian Lamont

Local Internet addicts know that trying to access ICRT's live feed over the World Wide Web can be a royal pain.

It's not just the hassle of downloading RealPlayer 5.0 and attempting to coax the system up to speed. Most of the time, it's difficult to even make a connection.

The problem, says ICRT General Manager Doc Casey, can be blamed on two factors: the site's enormous popularity and limited bandwidth in Taiwan.

According to Casey, thousands of people visit ICRT's website ( every day to read program schedules, DJ profiles, news transcripts and the web version of ICRT Voice.

The station doesn't measure hits, but more concrete "user sessions," which represent longer visits to the site.

"We get about 5,000 to 7,000 user sessions per day," reveals Casey, adding that several hundred of the sessions represent people trying to access the site's live transmission of ICRT's FM programming.

Internet listeners come from Taiwan as well as other countries. Large numbers of Taiwanese students living abroad, former residents of the island and people simply interested in Taiwan affairs can be found trying to "tune in" via the WWW at any given time.

"We get e-mail from people all over the world commenting on shows throughout the day," says Casey.

However, the bandwidth bottleneck means there isn't enough room for everybody to listen to the live feed.

"Right now, we're only serving about 20 people at a time," admits Casey. "It's maxed out."

One solution is to start charging users to hear the Internet feed, through the use of passwords or special software. While making people pay to hear ICRT over the Internet will undoubtedly turn away some listeners, station management feels that a fee system is the most logical way of paying for the additional hardware and software required to expand the service.

"We're still trying to calculate what we should charge," states Casey. "We're trying to keep it as low as possible -- we're not trying to make a profit on it."

The broadcaster stresses that a decision has yet to be made on whether or not to implement the fee system. In the meantime, staff are working on streamlining the site by reducing graphics and working with Microsoft to develop an overall "Internet strategy."

Many other media organizations took a similar approach as ICRT: Put the content online for free to establish an audience while they figured out a business model to support it. Many media companies are still following this philosophy.

(ICRT was also frustrated by technology limitations and high costs that prevented them from scaling the service to meet demand. Now, the widespread availability of broadband has made it easier to render audio streams on the user end, but scaling streamed media to lots of concurrent users is difficult. In addition, content providers still have to deal with high costs -- even though there are lots of free or cheap tools to create websites, they are expensive to customize and integrate with other services.)

Unfortunately for publishers, four negative trends emerged as more and more established print and broadcast outlets went online and offered their content for free:

  1. Audiences came to expect that practically every type of news and information should be free.
  2. It became very difficult for news outlets to establish pay walls if their direct competitors were offering content for free.
  3. The ocean of free online content undermined the local quasimonopolies for information. Consumers were no longer locked into local media outlets for world news, feature stories, or opinion columns. For instance, starting in 1996 I started reading the New York Times online for free. This reduced my dependence on the English-language news outlets I depended on in Taiwan, including local newspapers, CNN, and the International Herald Tribune.
  4. The ocean of free news, combined with the emergence of search engine results pages and online community pages, created what Rupert Murdoch refers to "near-infinite supply of inventory", which depressed online advertising prices.

One other thing to note about the emergence of online community pages. Back in 1998, people knew that personal online connections were a big deal. Email had gone mainstream by then, and people were already using search engines to look for old friends and colleagues. But massive social networking sites had not yet emerged. Still, the popularity of one online dating site in Taiwan gives an early window into the trends that would later characterize MySpace, Facebook, and Twitter. And, the basic formula for online popularity that I described in 1998 -- "Give people something they want, make sure it's simple to use, and offer it to them for free" -- still holds true today.

Here's what I wrote about LoveMatch in October 1998 for the China News Weekend section (It's long, but try to read the last sidebar and my closing comments that appear at the end of this post):

Cyber Love
By Ian Lamont

"Hi! I enjoy life and would like to meet friends from various career fields. I am an active, optimistic and easy-going girl. If you think you are smart or special enough, you can leave a message. PS: If possible, please send your picture to me, and do not send a copied letter. PPS: I appreciate the type of man who is smart and reacts quickly."
-- Randomly selected message from the LoveMatch website

Late last week, LoveMatch, Taiwan's premier Internet match-making service, passed an important milestone: The 150,000th user registered with the site, confirming it as one of the most popular Internet locations on the island.

To Steven Fox, General Manager of Overseas Connections, the company that operates LoveMatch and several other Taiwanese Internet sites, the success of the matchmaking service has been nothing short of phenomenal. The massive, searchable database adds hundreds of new user profiles every day.

"It just sort of took off exponentially," Fox says, describing the site's performance since its founding two years ago. "(The success has been) beyond our expectations, beyond what we ever thought we'd be doing with it."

"I look young outside, but inside I'm very mature. Thanks to last year's flowers, this year the pumpkins in the garden look beautiful. They should, because the sun shines down upon the pumpkins every morning. I hope everyone can find their own little piece of sunshine here."
-- Self-introduction from a male user in Yunlin

Understanding the appeal of LoveMatch requires a brief look at the current state of the Internet. Even though there are millions of sites on the world-wide computer network, only a small percentage can claim the same degree of success that LoveMatch now enjoys.

Most of the success stories, it turns out, have hit upon a basic formula that transcends cultural and linguistic differences: Give people something they want, make sure it's simple to use, and offer it to them for free. Yahoo! has climbed to the top of the search engine heap by adding e-mail and other free services. CNN has achieved similar success among news sites. And LoveMatch, appealing to one of the most important human characteristics -- the need to reach out to others -- has become one of the most popular websites in Taiwan.

However, Fox says there's another element which must be taken into consideration as well -- users can explore the database and communicate with other members without ever revealing their real name.

"The advantage LoveMatch offers is it's an anonymous system," he explains, "so somebody can meet somebody else online and not know who they are, not know their real name or real e-mail address. So it's very private, and people can be more open in that kind of environment."

"Since you've already seen my photo, send me yours as well (it's only fair!) and also your telephone number, so we can get in touch. I can be troublesome, so think it over carefully before writing."
-- Message posted by a female user in Taipei

Although anyone is free to search and read the thousands of user profiles on the site, communicating with others or placing a profile on the system requires a 15-minute registration session.

Weekend, or, more precisely, a female China News employee whom Weekend press-gangs into registering with LoveMatch, finds the process to be quite simple.

Firing up Netscape and going to, "Jennifer" follows the directions under the "register" and "build profile" links. Most of the information -- from blood type to favorite food to monthly salary -- is submitted though a series of pull-down menus or by checking off boxes. In no time, a profile is posted on the site and available for everyone to see.

While LoveMatch requires members to submit an e-mail address and name, neither makes it into the profiles section. Rather, "handles" identify users and provide a link to profiles as well as a way to contact the creator of the profile. Replies are automatically forwarded to the e-mail address, and it's up to the recipient whether or not to reply.

The site is entirely in Chinese, but a surprising amount of English makes it into the profiles. Many handles are English names or words, and those users who include a personal message with their profile frequently choose to write in English.

"A lot of Chinese overseas use our service," explains Fox. "A lot of people will write English into the forms because they can read Chinese but don't know how to type it. That's usually the system (in other parts of) Asia, and in North America."

Of the approximately 30,000 overseas members on the system, Fox notes that some are women in China seeking an overseas Chinese husband. But he stresses that not everyone is looking for a mate for life.

"We have several categories that you can put yourself into -- 'I'm looking for a person who wants a long-term relationship, short-term relationship, activity partner, or pen pal, or overseas friend.'"

"Hello! I'm a stockbroker. I only work a half day every day, so if you feel bored, or would like to take a walk, I will have time for you. My interests are making friends, travel and chatting with friends. Height: 170 cm. Weight: 59 kg. Age: 27. I look gentle. If you have any questions about stocks, we can always talk ..."
-- First overture to "Jennifer"

Despite the fact that Jennifer checks off the "e-mail friend" option when making her profile, the first reply she receives is from someone who wants more than a simple pen pal correspondence.

But Jennifer is not interested in a fleeting romance or stock tips, and is definitely not impressed with the writer of the message.

"'I don't care if we are together for a long time, I only want to possess what comes before,'" she recites, "that was copied from that watch commercial!" she exclaims.

"I think this message was sent to many women," she adds. "Look at it. There's nothing personal about it. It's not real."

According to Fox, this type of mass mailing is frequently uncovered by LoveMatch staff.

"If you are repetitive, just trying to send the same message to everybody, that's kind of like a red flag," he says.

"However, 99 times out of 100, we find that it's just some guy going through the lists of every single woman, sending the same romantic words to each one. And it's kind of pitiful."

"And they (the women) can tell!" he continues. "They'll put on their profile, 'Don't even try to send me the same words that you send to other women. Think of something unique and original!'"

Part of the problem, observes Overseas Connections Managing Director Jessie Chen, is the online gender imbalance.

"Males have less obstacles to get on the 'net," she says, describing the 4:1 ratio of male to female members in the LoveMatch database.

"Sometimes, the guys complain they don't get a response, and if a guy doesn't approach a woman and write a mail first, often they won't receive mail."

Chen and Fox indicate the five percent of users who include a personal photo with their profile invariably receive the most responses.

"Guys with photos will have more chances than guys without photos," states Chen.

Fox nods in agreement. "Typically, a woman who joins our website and posts a photo, within the first day or two she will receive over a hundred or two hundred e-mails," he says.

"It's pretty staggering. A lot of women will write back to us and say, 'How do I get off this thing?' because they're overwhelmed with the response."

"Hi! It's a holiday again. What have you got planned? I was born in 1970, Sagittarius, blood type A. Since getting out of the army, I have worked with immovable assets investments and interior decoration. Do you like movies? Movies and sports are my biggest interests."
-- Second reply received by "Jennifer"

Perhaps because she has not posted a photo, Jennifer's response rate has been minimal -- about one reply a day in the five days her profile has been up. None seem particularly promising, and she decides to "hide" her profile, shielding it from public view.

Should Jennifer decide to try again later, it's easy enough to re-open the profile or update her personal data. But for the time being, she says she'll stick to meeting people through more conventional means.

Not so many LoveMatch members are like Jennifer. Chen indicates that a majority of people who register remain active users for long periods of time. To some, LoveMatch becomes such an important part of their lives that they find themselves spending an hour each day checking their LoveMatch mail and responding to the more interesting senders.

"I remember there was a magazine publisher, and they told their staff to not check out LoveMatch at the beginning of work," recalls Chen.

"That's their routine. They all want to check their mail, and go to the website to see which guy sent them a message."

Then there are the marriages. To date, LoveMatch has received approximately 20 wedding invitations from couples who met through the service. Thousands of other relationships, from overseas pen pal exchanges to romantic matchups, have been started, thanks to LoveMatch.

Fox believes the site will continue to grow, as more people become familiar with the Internet and discover its potential to make friends online.

"It's community, user-driven content," he notes. "The more people join, the more content there is, and that in turn attracts more people to come. So it builds on itself."

Sidebar: Watching over the flock

For many people, the mere mention of the word "personals" is enough to set alarm bells ringing. Adding the free-for-all spirit of the Internet only increases the potential for disaster, they say.

Who in their right mind, goes the reasoning, would post their own personal information and even snapshots on the Internet where some crazed sex fiend or drooling stalker could spot it and send bucketloads of lewd or threatening e-mail?

LoveMatch executives downplay such concerns, noting the company has several technical safeguards in place. These not only protect members, but also ensure the site does not degenerate into the type of sleaze that scares off ordinary people.

One of the first safety-related features potential LoveMatch members will encounter is the requirement forbidding free e-mail addresses such as Hotmail and Yahoo!.

General Manager Steven Fox reports that foul language and spam (mass mailings of unwanted advertisements) from "certain sites" prompted the company to refuse people registering with free e-mail addresses.

"We did it for the safety and security of our members," Fox tells Weekend. "If a criminal were to take advantage of one of our members, we want to be able to have some evidence for police to prosecute this person."

"Requiring every user to use a valid e-mail address, instead of a bogus, free e-mail address, helps keep everyone honest."

The second safeguard is not so obvious. Fox mentions the existence of a "huge" keyword database. Every e-mail message submitted through LoveMatch goes through the database, and staff are automatically alerted when a questionable word or phrase pops up.

"Our webmaster meticulously deletes any users sending advertisements, plus we have a huge keyword list that blocks 90% of the spam from other members," he says. Words on the list include "Viagra" ("we've had people trying to sell it"), "totally free" and expletives.

"(They) can still send the message, but it goes direct to our webmaster instead of the intended member. She regularly gets 400 to 500 spam and foul language e-mails every day in her inbox from LoveMatch members."

The webmaster has other duties as well. One is to review photos sent in by members to accompany their profiles.

"She examines every photo that goes online," Fox describes. "We've had a lot of people who tried to send photos of movie stars, models, or Andy Lau. She'll reject it if she has any suspicions."

Of course, the webmaster is also responsible for answering questions from members, which range from ordinary how-do-I-change-this queries to personal "agony aunt" advice.

"I think the fact that we do have a real person running the site, who responds to every member's enquiry and watches out for all members' security, and that it's not totally automated, makes LoveMatch a desirable place to meet friends online," concludes Fox.

Sidebar: Money matters

It's almost certain LoveMatch would never have made it to where it is today were it not for the fact that it is a free Internet service.

This naturally leads to the question on how the site's operating costs are paid for.

The answer should come as no surprise to anyone who spends a lot of time online: Banner advertising. The ads appear as small rectangles at the top of every LoveMatch screen, plugging everything from radio stations to local charities. According to LoveMatch co-founder Steven Fox, the going rate for banner advertising on the website is NT$500 per thousand ad impressions (CPM).

Nothing unusual there. But what is special about LoveMatch's advertising strategy is its move to band together with other smaller Taiwanese websites to approach potential clients as a unified group.

"We discovered that placing advertising is not all that simple," Fox explains. "Furthermore, it costs a lot to have sales reps, marketing, technology to serve the ads and report on the advertising."

"So we decided to start a separate company, ASIAD, that will combine LoveMatch and many other websites into an advertising network, and will allow many of these sites that cannot afford (web advertising) individually, to place advertising on their sites collectively. And that seems to be a much more cost effective and efficient means."

Currently, there are a dozen small websites being served by ASIAD, says Fox.

"The smaller websites find it extremely beneficial to join an advertising network, because the costs are really high to sell advertising."

"And you cannot compete as a small fry as well, because advertisers like to get rid of their budget as quickly and as easily as possible. And they don't want to have to go to each individual small site, even if it's a good site. They don't have the time, and they don't want to bother."

"So, essentially, ASIAD is going head to head with the bigger websites."

But the Internet advertising market is still uncharted territory in many respects. Despite LoveMatch's huge membership and the apparent success of ASIAD in finding advertisers, Fox is reluctant to divulge how much LoveMatch is making, or even whether the site is managing to break even.

"You should ask if any standalone Internet website in Taiwan is making a profit!" he responds to Weekend's question on the subject.

If that same question were put to the people who run popular social startups today, the answer would be similarly defensive. No one wants to admit that their free service is losing money, or barely breaking even. The geniuses behind Twitter are famously reluctant to talk about costs or business plans. When I interviewed the chief executive of Linden Lab in 2009 (the company behind Second Life) I was told the company was profitable, but not by how much. Other social sites have abruptly pulled the plug when venture capital dries up and/or they are not able to execute on revenue plans.

The other interesting thing about the LoveMatch story is that many of the issues that bedeviled advertisers back then (e.g., "it costs a lot to have sales reps, marketing, technology to serve the ads and report on the advertising") are still present now. In addition, ad networks have shifted from the experimental cooperatives described in my 1998 article to mainstays of the Web media economy. Unfortunately, ad networks generally haven't been able to provide news sites with sufficient revenue to offset their losses in traditional media (such as print) or support robust editorial operations. I would argue that certain ad networks have even had a terrible impact on the sites they ostensibly support, by competing with premium inventory on much lower CPMs and introducing vast amounts of low-quality advertising (teeth whiteners, bogus online education programs, scammy loans, etc.) into the mix which can harm the image of quality news brands.

Lastly, a little "Where are they now": ICRT is still around, and is still streaming its content for free over the Internet (and is still "almost impossible" to pick up, reports a friend who lives in Taipei). Asiad was acquired by DoubleClick in 1999, but has since "reemerged as an independent company," according to the Asiad website. The LoveMatch domain now redirects to another Taiwanese dating site, but an icon on the site says "powered by LoveMatch". 

More posts by Ian Lamont on the future of media:

Sources and research: My China News article archive, ICRT website,,

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